Boston Trust Company Ltd & Anor (Trustees of Erutuf Trust) v Szerelmey Ltd & Ors

A claimant authorised to pursue a derivative action for the benefit of a company will ordinarily be entitled to an indemnity from the company for reasonably incurred costs. This principle does not depend on proof of impecuniosity or a separate showing of genuine need.

The court must nevertheless exercise care. It should consider whether the claim has sufficient substance and whether an independent board acting prudently would regard it as being in the company’s interests. A pre-emptive indemnity may be limited to a procedural stage and reviewed later. A different approach may be appropriate where the derivative claim is in substance a dispute between partners or shareholders pursuing their own interests.

The claimants were trustees and shareholders in Tellisford Limited, an indirect parent of three operating companies. They brought a multiple derivative action alleging that the fifth defendant, a director and indirect majority shareholder, had procured the transfer of company assets and business opportunities to companies under his control.

Permission to continue the derivative claims had been granted conditionally in earlier proceedings before Stephen Houseman QC, sitting as a Deputy Judge of the High Court. The condition concerning the claimants’ shareholder standing was later satisfied through retrospective rectification of Tellisford’s register.

The issue was whether the operating companies should indemnify the claimants prospectively for their costs, including possible adverse costs, and whether costs incurred in the earlier permission proceedings should be ordered immediately.

1. Pre-emptive indemnity. The application for an indemnity succeeded. Where the court has permitted a claimant to pursue proceedings in the interests of, and on behalf of, a company, the claimant is in principle entitled to be indemnified by the company for the costs and liabilities of the derivative action. The principle derives from Wallersteiner v Moir (No 2) [1975] QB 373 and was supported by Jaybird Group v Greenwood [1986] BCLC 319, Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch) and Wishart v Castlecroft Securities Ltd [2009] CSIH 65.
2. The claimant need not prove lack of funds or impecuniosity. The indemnity is justified by the representative nature of the derivative claim and the fact that any benefit will accrue principally to the company. The contrary argument based on Smith v Croft (No.1) [1986] 1 WLR 580 misunderstood the passage relied upon, which concerned interim payments rather than the existence of the underlying indemnity.
3. The jurisdiction must be exercised with care. The court should assess whether the claim has sufficient substance and whether an honest, independent and impartial board would regard pursuit of it as being in the company’s interests. The court should not conduct a mini-trial. The strength of the claims found at the permission hearing was sufficient in this case.
4. The exceptional considerations in Halle v Trax [2000] BCC 1020, Bhullar v Bhullar [2015] EWHC 1943 (Ch) and Tonstate Group Ltd v Wojakovski [2019] BCC 990 did not apply. This was a genuine minority shareholder derivative claim involving alleged misconduct by a person in control, rather than a straightforward dispute between equal partners or shareholders in companies being wound down.
5. The indemnity was ordered through exchange of witness statements, with review at the pre-trial review stage. It included costs already incurred and adverse costs, on terms to be agreed. The application for immediate inter partes payment of earlier costs was adjourned until after the Court of Appeal determined the pending appeal concerning conditional permission.

The judgment records earlier permission proceedings before Stephen Houseman QC, sitting as a Deputy Judge of the High Court. His conditional permission decision was under appeal by Mr Verhoef to the Court of Appeal, with the appeal listed for April 2021. The present court granted the prospective indemnity but deferred final responsibility for earlier costs pending that appeal.